Enterprise Software Tastes Like Lemons

Buying and selling vital enterprise services revolves around credibility.  There’s a lot in there, so let me unpack it.  By an “enterprise”, I mean a large business or governmental agency with hundreds or thousands of employees, overseeing the deployment of large resources.  By “services”, I mean a lot of stuff – it can be straightforward services like agreeing to distribute goods.  It can be software, which is what I work in and am most familiar with.   And by “vital”, I mean just that.  The company I work for sells infrastructure software, specifically what is often called “middleware”.  Middleware enables core transactional systems, like a point-of-sale system and an accounting system, to share data with each other.  When you buy our software, you are going to restructure your business such that if our software stops working your business will stop working.

Hence the importance of credibility.  Enterprise software, the field I know best, is crowded and becoming more crowded every day.  Currently, “enterprise” rather than “social” is the ticket to the heart of Sand Hill Road investors.  But there’s a real advantage to incumbency in the space that goes beyond the pat and comforting answer of “path dependence”, which is that everyone buying enterprise software wants to know that other enterprises have bought the same software and survived.  Any team of competent engineers can put together great demos and cool lists of features, but the most valuable asset in selling is a long list of happy clients to serve as references.  All enterprise vendors can and do promise the world, but it’s a real leap of faith for a purchaser to hop onboard with them.

This is a classic “information asymmetry”, one that puts purchasers at a disadvantage and renders products, especially new products, less valuable.  George Akerlof called this a “lemon market“, after the unknown quality of a used car. Since vendors have every incentive to lie, purchasers shouldn’t trust the information coming from vendors.  They often don’t, and thus have to expend huge amounts of legwork in tracking down everyone the vendor has done business with.  Because it’s not just about features or even reliability – it’s about how often “unforeseeable” and “unique” bugs pop up and how well the vendor handles it when things inevitably go south.  For purchasers, this is a huge pain and a transaction cost that decreases the price they are willing to pay for any product, especially good ones.

Angie’s List solved this problem for home contractors, but the enterprise market is both a lot more important and a lot more complicated.  And so the potential for profit is that much greater.


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